Tuesday, November 18, 2008

VOLKSWAGEN would go bankrupt ?

Sen. Lamar Alexander said Thursday that Volkswagen’s new plant in Tennessee could be affected if the country’s financial crisis isn’t resolved, while a spokeswoman for the automaker downplayed the impact."We build great cars. But our costs are far higher than our targets," Wolfgang Bernhard, head of the VW brand, told the Wolfsburg workforce just over a week ago. "Let us all pull together to make this plant viable and your jobs safe. Wolfsburg has to get off the reserves' bench and become our striker."

Alexander, R-Tenn., said he was told by executives at the recent opening of Volkswagen AG’s new American headquarters in Virginia last week that the German automaker’s credit branch is having trouble securing the $300 million it borrows each month to make car loans.

If that credit crunch gets worse, it could affect VW’s plans to build cars at a new plant in Chattanooga, Alexander said in a telephone interview with The Associated Press from Washington.

“If a company the size and prestige of Volkswagen can’t get the money to make car loans, then I can’t buy a car,” Alexander said. “And if I can’t buy a Volkswagen, they’re not going to be making any in Chattanooga, and people aren’t going to have jobs.”

Volkswagen spokeswoman Jill Bratina denied the financial crisis will have any impact on the company’s plans to build a $1 billion assembly plant and create 2,000 jobs in Chattanooga.

“Our Volkswagen Credit business is extremely strong,” she said. “We have access to the necessary funds and will continue to offer a full range of services to our customers and dealers.”

Alexander said he expects Congress to reach an agreement by the end of the weekend over a $700 billion bailout plan to rescue financial institutions from crippling debt.

“People are beginning to understand that what we’re talking about is whether a Tennessean can get a student loan or a mortgage loan, or car loan, or whether our home values are solvent,” he said. “This is a circumstance none of us has ever seen before.”

Tennessee Congressmen Jimmy Duncan and Zach Wamp, both Republicans, agree quick action is needed to restore confidence in the financial system, but they have serious reservations about the bailout plan being pushed by Congress and the president.

“Congress should never have been put in a position of having to intervene in the private sector,” Wamp said.

Wamp said he won’t make up his mind on a compromise being negotiated by Congressional leaders, until he sees the details, but either way “I’m just sick having to vote on it … I am literally in prayer about it.”

Government intervention in the private sector goes against his core beliefs, but doing nothing could cost Tennessee jobs and rob workers of retirement benefits, Wamp said.

“I’ve casts thousand and thousands of votes and this is going to be really the worst of all,” Wamp said.

Rep. John Duncan Jr., R-Tenn., praised President Bush for his remarks Wednesday, but said they didn’t change his mind about the bailout proposal.

“They are asking us to do something that we really can’t afford. I assume we’re going to do it anyway,” Duncan said. “The only way we can come close to affording it is to have drastic cuts in programs, which we are not going to do with a Democrat-controlled Congress.”

Duncan lamented that the federal government is spending more money now than at any time he can remember since joining Congress.

“It’s big government liberalism that got us into this mess and now they’re saying we need more government to get us out. I sure am against the whole way of going about this. There’s not a good choice. It’s ridiculous to bail out millionaires on Wall Street when we won’t do the same to people on Main Street,” Duncan said, stopping short of saying he will vote against the bail-out package.

Duncan said all the details of the bi-partisan proposal have not been received on Capitol Hill, so he can’t make a decision until he’s seen the full package.

Details still being worked out include ways to avoid what Alexander called “excessive risk” for taxpayers.

“We ought to make sure we have aggressive oversight, that any revenues that go to government go to reduce our federal debt and not into the federal piggy bank, and that executives of firms that got into trouble don’t get rich as a result of us buying these mortgages,” he said.

Alexander praised the two presidential nominees, Democratic Sen. Barack Obama and Republican Sen. John McCain, for agreeing to meet with President Bush and work toward a solution.

But Alexander said he hadn’t expected McCain’s announcement that he wanted to postpone Friday’s presidential debate in Mississippi to focus on the economy.

Belmont University in Nashville is scheduled to host the second presidential debate on Oct. 7.

Alexander said another issue of importance to Tennesseans working its way through Congress is a proposal for a two-year extension of the sales tax exemption for states like Tennessee, Florida and Texas that don’t have an income tax.

Alexander said about 600,000 Tennesseans are eligible for the deduction, and that it saves an average of $400 a year on federal taxes.

“It’s only fair that Tennesseans are able to deduct their state and local taxes, just as citizens in more than 40 states are able to do it,” he said. “We’ve decided we don’t want a state income tax, and we shouldn’t be penalized for that.”

The sales tax deduction was part of a package passed by the Senate that included energy incentives and Alternative Minimum Tax proposals. But the House is evaluating each of those proposals in separate bills, which could lead to a showdown between the two chambers.

“That means none of it may become law,” Alexander said. “So I hope the House changes its mind.”The striker is severely injured at the moment. With its four chimneys and brick-block construction, Wolfsburg towers like a vast Battersea power station above the North German Plain. It has 75,000 employees, of whom 25,000 work in administration at VW's headquarters, while 10,000 make parts for the assembly line.

Mr Bernard, who was booed and whistled at by the Wolfsburg workforce, unveiled charts showing that VW loses €1,020 (£700) on every Golf it makes. The new Golf, to be launched in 2009, has to be at least €1,500 cheaper to build. This would make it profitable, but if the car is to be competitive, costs would probably have to be even lower than that. Meanwhile, price pressure is hitting home, and traditional Golf drivers are deserting it for other cars, such as SUVs.

Cost-cutting will require dropping over-engineered features, including the Golf's complex rear-axle, to slash construction time from 50 hours to less than 30. Purchasing, logistics and manufacturing processes have to be improved. But, above all, it means fewer jobs.

"We must make our labour costs competitive," Mr Bernhard said. "If we do that, cars can be produced in Wolfsburg competitively. Secure jobs depend upon competitiveness."

Mr Bernhard wants to raise the 28.8-hour working week on the assembly line to 35 hours without raising pay. This would bring Wolfsburg and VW's other plants in line with their German competitors. At the same time, he hopes to persuade 20,000 German workers to leave VW with voluntary redundancy packages worth up to €250,000 each. To date, just 800 workers have opted to do so. The unions point out that VW's plants are located in areas of high unemployment, and the payments would be halved by tax. The chief union negotiator, Hartmut Meine of IG Metall, has flatly refused to renegotiate the current contract, which guarantees job security past 2010.

The crisis at Wolfsburg and VW is so deep that Mr Bernhard recently aired the idea that the next Golf might not be built there. "We want to build the next Golf in Wolfsburg," he said, "but only if the company does not pay for every car sold."

The suggestion that Wolfsburg might, in effect, be closed down caused union outrage. Anger was also expressed about a story, quickly denied by the company, that suggested VW wanted to cut its German workforce by 30,000.

Feelings are running high. The unions are now gearing themselves for strikes and protests as sensitive talks on jobs and wages restart later this week.

Yet fundamental change is inevitable, according to analysts. "Little has happened to date," says Albrecht Denninghoff at HVB Equity Research. "VW announced its profits target last year and we have seen no great change. The unions rightly demand an overall plan, which we have not seen. Frankly, we are rather surprised by the way the company has behaved."

Another analyst, who asks not to be identified, adds: "VW has to move to a 35-hour week without additional pay, then it has to cut its overcapacity. It can make six million cars at its German plants but sells only five. It will need many successful models to make up the difference. I don't see it happening. It is hard to be optimistic for employees."

VW set itself the goal of achieving profits of €5.1bn in 2008. Yet this would only move it close to covering its costs. It would not make it competitive.

Patrick Juchemich, an analyst at Sal Oppenheim, an investment bank, predicts that disposals, including that of the Europcar rental group, will help offset the €1.7bn potential cost of the voluntary redundancy programme. As a result, VW's profits might rise from €1bn to €2.6bn in 2006. Yet, he warns: "The previous programme was not well received at all. This is more generous but reaction has been modest."

There are signs that the unions see the gravity of the situation. Bernd Osterloh, the head of the VW works council, is a member of the company's supervisory board. (Under German law, the supervisory board represents both investors and employees, and approves important corporate decisions.) Mr Osterloh blames management for the problems. "It is not the workforce's fault that it takes 50 hours to build the car," he said. "Competitors need half the time. The Golf is so complicated that we really cannot build it."

Mr Osterloh has said he is willing to discuss labour costs with the board. But: "I want to know what the company is going to do with the money in order to survive in the longer term." He also criticised VW for the decision to build the new Scirocco coupé in Portugal, rather than at Wolfsburg, where it would reduce excess capacity.

The relationship between capital and labour has to change, as HVB's Mr Denninghoff points out. "Is this a company that provides employment to its workforce," he asks, "or returns to shareholders?"

Yet the challenge is so great because so many jobs are threatened at once. Increasing the working week and halving the Golf's construction time will create further overcapacity, not least at Wolfsburg.

"Purely mathematically, the effects of these measures would be 30,000 job losses in Germany. But they are unlikely to see 20,000 under present circumstances," says Mr Juchemich at Sal Oppenheim.

Becoming competitive - Mr Bernhard's stated goal - suggests yet more cuts. Currently, one hour's work on the assembly line in Wolfsburg costs the company €55, compared with €40 at its competitors' plants in Germany - and just €5.50 in VW's plant in Bratislava, Slovakia.

Mr Denninghoff claims a competitive workforce would require 60,000 job losses, leaving VW with just 40,000 German employees, a dire prospect for the country's economy. Yet this simply reflects what is happening in the car industry."Mercedes has reduced the headcount of its Stuttgart headquarters to eight or nine thousand," he says. "There seems no reason for VW to have 25,000 people in administration at Wolfsburg."